Clear and Present Danger: Australia to be hit as Chinese economy unravels; The iron ore price will continue to tumble, causing significant issues for Australia
BEIJING — China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a transformative event that could set off a new wave of growth or saddle the country with problems for generations to come.
The government, often by fiat, is replacing small rural homes with high-rises, paving over vast swaths of farmland and drastically altering the lives of rural dwellers. So large is the scale that the number of brand-new Chinese city dwellers will approach the total urban population of the United States — in a country already bursting with megacities.
This will decisively change the character of China, where the Communist Party insisted for decades that most peasants, even those working in cities, remain tied to their tiny plots of land to ensure political and economic stability. Now, the party has shifted priorities, mainly to find a new source of growth for a slowing economy that depends increasingly on a consuming class of city dwellers.
The shift is occurring so quickly, and the potential costs are so high, that some fear rural China is once again the site of radical social engineering. Over the past decades, the Communist Party has flip-flopped on peasants’ rights to use land: giving small plots to farm during 1950s land reform, collectivizing a few years later, restoring rights at the start of the reform era and now trying to obliterate small landholders.
Across China, bulldozers are leveling villages that date to long-ago dynasties. Towers now sprout skyward from dusty plains and verdant hillsides. New urban schools and hospitals offer modern services, but often at the expense of the torn-down temples and open-air theaters of the countryside.
“It’s a new world for us in the city,” said Tian Wei, 43, a former wheat farmer in the northern province of Hebei, who now works as a night watchman at a factory. “All my life I’ve worked with my hands in the fields; do I have the educational level to keep up with the city people?”
China has long been home to both some of the world’s tiniest villages and its most congested, polluted examples of urban sprawl. The ultimate goal of the government’s modernization plan is to fully integrate 70 percent of the country’s population, or roughly 900 million people, into city living by 2025. Currently, only half that number are.
The building frenzy is on display in places like Liaocheng, which grew up as an entrepôt for local wheat farmers in the North China Plain. It is now ringed by scores of 20-story towers housing now-landless farmers who have been thrust into city life. Many are giddy at their new lives — they received the apartments free, plus tens of thousands of dollars for their land — but others are uncertain about what they will do when the money runs out.
Aggressive state spending is planned on new roads, hospitals, schools, community centers — which could cost upward of $600 billion a year, according to economists’ estimates. In addition, vast sums will be needed to pay for the education, health care and pensions of the ex-farmers.
While the economic fortunes of many have improved in the mass move to cities, unemployment and other social woes have also followed the enormous dislocation. Some young people feel lucky to have jobs that pay survival wages of about $150 a month; others wile away their days in pool halls and video-game arcades.
Top-down efforts to quickly transform entire societies have often come to grief, and urbanization has already proven one of the most wrenching changes in China’s 35 years of economic transition. Land disputes account for thousands of protests each year, including dozens of cases in recent years in which people have set themselves aflame rather than relocate.
The country’s new prime minister, Li Keqiang, indicated at his inaugural news conference in March that urbanization was one of his top priorities. He also cautioned, however, that it would require a series of accompanying legal changes “to overcome various problems in the course of urbanization.”
Some of these problems could include chronic urban unemployment if jobs are not available, and more protests from skeptical farmers unwilling to move. Instead of creating wealth, urbanization could result in a permanent underclass in big Chinese cities and the destruction of a rural culture and religion.
The government has been pledging a comprehensive urbanization plan for more than two years now. It was originally to have been presented at the National People’s Congress in March, but various concerns delayed that, according to people close to the government. Some of them include the challenge of financing the effort, of coordinating among the various ministries and of balancing the rights of farmers, whose land has increasingly been taken forcibly for urban projects.
These worries delayed a high-level conference to formalize the plan this month. The plan has now been delayed until the fall, government advisers say. Central leaders are said to be concerned that spending will lead to inflation and bad debt.
Such concerns may have been behind the call in a recent government report for farmers’ property rights to be protected. Released in March, the report said China must “guarantee farmers’ property rights and interests.” Land would remain owned by the state, though, so farmers would not have ownership rights even under the new blueprint.
On the ground, however, the new wave of urbanization is well under way. Almost every province has large-scale programs to move farmers into housing towers, with the farmers’ plots then given to corporations or municipalities to manage. Efforts have been made to improve the attractiveness of urban life, but the farmers caught up in the programs typically have no choice but to leave their land.
The broad trend began decades ago. In the early 1980s, about 80 percent of Chinese lived in the countryside versus 47 percent today, plus an additional 17 percent that works in cities but is classified as rural. The idea is to speed up this process and achieve an urbanized China much faster than would occur organically.
The primary motivation for the urbanization push is to change China’s economic structure, with growth based on domestic demand for products instead of relying so much on export. In theory, new urbanites mean vast new opportunities for construction companies, public transportation, utilities and appliance makers, and a break from the cycle of farmers consuming only what they produce. “If half of China’s population starts consuming, growth is inevitable,” said Li Xiangyang, vice director of the Institute of World Economics and Politics, part of a government research institute. “Right now they are living in rural areas where they do not consume.”
Skeptics say the government’s headlong rush to urbanize is driven by a vision of modernity that has failed elsewhere. In Brazil and Mexico, urbanization was also seen as a way to bolster economic growth. But among the results were the expansion of slums and of a stubborn unemployed underclass, according to experts.
“There’s this feeling that we have to modernize, we have to urbanize and this is our national-development strategy,” said Gao Yu, China country director for the Landesa Rural Development Institute, based in Seattle. Referring to the disastrous Maoist campaign to industrialize overnight, he added, “It’s almost like another Great Leap
The costs of this top-down approach can be steep. In one survey by Landesa in 2011, 43 percent of Chinese villagers said government officials had taken or tried to take their land. That is up from 29 percent in a 2008 survey.
“In a lot of cases in China, urbanization is the process of local government driving farmers into buildings while grabbing their land,” said Li Dun, a professor of public policy at Tsinghua University in Beijing.
Farmers are often unwilling to leave the land because of the lack of job opportunities in the new towns. Working in a factory is sometimes an option, but most jobs are far from the newly built towns. And even if farmers do get jobs in factories, most lose them when they hit age 45 or 50, since employers generally want younger, nimbler workers.
“For old people like us, there’s nothing to do anymore,” said He Shifang, 45, a farmer from the city of Ankang in Shaanxi Province who was relocated from her family’s farm in the mountains. “Up in the mountains we worked all the time. We had pigs and chickens. Here we just sit around and people play mah-jongg.”
Some farmers who have given up their land say that when they come back home for good around this age, they have no farm to tend and thus no income. Most are still excluded from national pension plans, putting pressure on relatives to provide.
The coming urbanization plan would aim to solve this by giving farmers a permanent stream of income from the land they lost. Besides a flat payout when they moved, they would receive a form of shares in their former land that would pay the equivalent of dividends over a period of decades to make sure they did not end up indigent.
This has been tried experimentally, with mixed results. Outside the city of Chengdu, some farmers said they received nothing when their land was taken to build a road, leading to daily confrontations with construction crews and the police since the beginning of this year.
But south of Chengdu in Shuangliu County, farmers who gave up their land for an experimental strawberry farm run by a county-owned company said they receive an annual payment equivalent to the price of 2,000 pounds of grain plus the chance to earn about $8 a day working on the new plantation.
“I think it’s O.K., this deal,” said Huang Zifeng, 62, a farmer in the village of Paomageng who gave up his land to work on the plantation. “It’s more stable than farming your own land.”
Financing the investment needed to start such projects is a central sticking point. Chinese economists say that the cost does not have to be completely borne by the government — because once farmers start working in city jobs, they will start paying taxes and contributing to social welfare programs.
“Urbanization can launch a process of value creation,” said Xiang Songzuo, chief economist with the Agricultural Bank of China and a deputy director of the International Monetary Institute at Renmin University. “It should start a huge flow of revenues.”
Even if this is true, the government will still need significant resources to get the programs started. Currently, local governments have limited revenues and most rely on selling land to pay for expenses — an unsustainable practice in the long run. Banks are also increasingly unwilling to lend money to big infrastructure projects, Mr. Xiang said, because many banks are now listed companies and have to satisfy investors’ requirements.
“Local governments are already struggling to provide benefits to local people, so why would they want to extend this to migrant workers?” said Tom Miller, a Beijing-based author of a new book on urbanization in China, “China’s Urban Billion.” “It is essential for the central government to step in and provide funding for this.”
In theory, local governments could be allowed to issue bonds, but with no reliable system of rating or selling bonds, this is unlikely in the near term. Some localities, however, are already experimenting with programs to pay for at least the infrastructure by involving private investors or large state-owned enterprises that provide seed financing.
Most of the costs are borne by local governments. But they rely mostly on central government transfer payments or land sales, and without their own revenue streams they are unwilling to allow newly arrived rural residents to attend local schools or benefit from health care programs. This is reflected in the fact that China officially has a 53 percent rate of urbanization, but only about 35 percent of the population is in possession of an urban residency permit, or hukou. This is the document that permits a person to register in local schools or qualify for local medical programs.
The new blueprint to be unveiled this year is supposed to break this logjam by guaranteeing some central-government support for such programs, according to economists who advise the government. But the exact formulas are still unclear. Granting full urban benefits to 70 percent of the population by 2025 would mean doubling the rate of those in urban welfare programs.
“Urbanization is in China’s future, but China’s rural population lags behind in enjoying the benefits of economic development,” said Li Shuguang, professor at the China University of Political Science and Law. “The rural population deserves the same benefits and rights city folks enjoy.”
When you're in Seoul do a quick trip and ask the Chinese why they plan to use mud to house 250 million people as Jimbo says you cant buy Australian Iron Ore anymore.
These plans are also dated, they have expanded them this to house 300 million by 2020 in new construction. I will find them for you another day.
I will take that bet, my bet is Iron Ore ill be closer to $100 a ton by Christmas then it is to $75.
When you're in Seoul do a quick trip and ask the Chinese why they plan to use mud to house 250 million people as Jimbo says you cant buy Australian Iron Ore anymore.
I will take that bet, my bet is Iron Ore ill be closer to $100 a ton by Christmas then it is to $75.
You are making stuff up again Mike.
I think you will find what I said was
Quote:
China will continue to buy our ore, but they will buy it at a knockdown price.
But if you think that China will continue to expand its housing stock and infrastructure at the pace that it has been, then you are mistaken.
As for IO being "closer to $100 than $75", in plain English, what you are saying is that the IO price will be greater than $87.50 US
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Just so you understand the rising export volumes will contribute to GDP growth in this quarter. So while prices may fall export volumes are ramping up. China will always buy our Iron Ore as it the best product at the best price. Our miners are the most efficient and productive in the world.
So while you say China is buying more now, it has been buying more all year long and will continue to do so. Hence why our exports of Iron Ore continue to rise despite what you may think.
So, before the price dropped, the mining companies made money. Great. But that is relevant now how??
Jimbo
7 Sep 2014, 03:39 AM
You are making stuff up again Mike.
I think you will find what I said was
As for IO being "closer to $100 than $75", in plain English, what you are saying is that the IO price will be greater than $87.50 US
This ain't much of a prediction. Basically he's saying he expects it to be in it's trading range.
05 Sep 2014 Jacob Greber, Angus Grigg and Amanda Saunders
The federal government’s former top resources forecaster says the economy faces a painful downturn in 2015 as a property crisis in China accelerates the biggest hit to Australia’s export income in more than two decades.
Speaking after iron ore plunged to a five-year low of $US85.70 a tonne, the former chief economist and head of the Australian Bureau of Resources and Energy Economics, Quentin Grafton, said the Chinese economy looked like it was “unravelling”.
He said falling prices for coal and iron ore, a slump in business investment, an overpriced housing market and high dollar had placed the Reserve Bank of Australia “between a rock and a hard place”. “Put all those things together and it could be a difficult ride for us,” he said. “This isn’t about doom and gloom – it’s about looking at the risks and numbers. There’s a clear and present danger.”
The remarks add to doubts about the economy’s underlying resilience and the robustness of the government’s revenue expectations after this week’s national accounts showed income fell in 2013-14 and 2012-13, the first two-year decline since the early 1990s recession.
The incomes crunch looks likely to continue. Falling commodity prices in recent months further depressed the terms of trade, a broad measure of what Australia can buy with its export earnings and a key driver of tax revenues and living standards.
The benchmark price for iron ore – which accounts for more than $1 out of every $5 of export income – has fallen 35 per cent this year to around half its 2011 high of $US190.
In a sign of how rapidly demand for steel has dropped in the world’s second-biggest economy, police arrested more than 40 steel traders in Shanghai for credit card fraud who were apparently trying to circumvent a crackdown on lending by banks to the troubled sector.
Fund manager Evy Hambro, who oversees a $US7.3 billion global mining fund for BlackRock, said it was odd the Australian dollar had remained high given weak iron ore and coal prices. “That relationship seems to be unusual, and therefore it’s likely that something is going to give. It could be that the Australian dollar weakens or that the iron ore price recovers in the near term. Our best guess is that it’s probably a little bit of both.”
The dollar held steady around US93.35¢ on Thursday despite falling commodity markets.
The iron ore price has been driven down by fears a crash in China’s property market, which experienced its worst drop on record in July, could have a big impact on the Chinese economy. Property prices declined in 91 per cent of the 70 cities surveyed by China’s National Bureau of Statistics, as buyers put off making a purchase due to concerns about over-supply. In July, property sales declined by 17.9 per cent from a year earlier. The number of unsold apartments rose by 25 per cent over the same period.
Researchers at Texas A&M University estimate China has a residential vacancy rate approaching 20 per cent and there could be as many as 48 million empty apartments across the country after years of over-building.
Former Labor trade minister Craig Emerson criticised economic commentators for being “too sanguine” about the risks facing Australia.
He said the Abbott government appeared to be softening up voters for revenue downgrades in the mid-year budget update, noting Treasurer Joe Hockey’s remarks on Wednesday that prices for iron ore were now well below forecasts in the May budget.
“There’s a genuine challenge here that’s not going to go away with a turn-up in the next quarter’s numbers,” said Dr Emerson, who now runs a Canberra-based economic consultancy.
“Iron ore and coal continues to fall, so the income that we get from overseas is continuing to slow – and at this stage we’re not getting a sustainable source of income to replace it,” he said.
Debate about Australia’s income shock intensified this week after the Australian Bureau of Statistics reported per capita net national disposable income fell 0.4 per cent last financial year, adding to a 1.6 per cent decline in the previous year.
Other than the early 1990s downturn, the last time there were two straight years of falls was during the 1960s credit squeeze.
Fasten your safety belts -- Australia is set for a ride we have not experienced for decades. In blunt terms, we will either see a sharp fall in the dollar or we will run into a recession.
If Stephen Bartholomeusz is right about the extent of looming iron ore capacity excesses and former chairman of the Federal Reserve Alan Greenspan is right about what's going to happen in China, then we are in for a rough ride.
Australia was always going to face a tough time given the end of the mining investment boom, the government’s closure of automotive manufacturing and the retrenchments coming from corporate labour shedding. But we had some pluses, including infrastructure spending.
But now comes a dramatic slump in iron ore revenues. Australia rides on the back of iron ore, coal and gas. Gas prices are linked to oil, which is falling. But the position in iron ore is more serious.
The iron ore price has already fallen 40 per cent, but Stephen Bartholomeusz’s commentary reveals staggering overcapacity looming for the industry, which could see the price fall much further before stabilising at low levels (The worst is yet to come for our miners, September 10). Last night the metal fell again (Iron ore price in fresh slump, September 10).
Bartholomeusz totals the truly enormous expansions coming in the iron ore pipeline: Brazil’s Vale will lift production by 130 million tonnes a year by 2018; Rio Tinto and BHP Billiton combined plan to add a similar tonnage to their already greatly-increased outputs; Gina Rinehart’s Roy Hill will lob 55 million tonnes on the market starting next year. Including other projects, we are looking at an extra 350 million tonnes.
It looks like the market is already oversupplied by 100 million tonnes and that China will not exit iron ore production, so cutbacks in Chinese production will be minor.
If the Chinese economy continues to boom as anticipated, then we would be looking at a temporary problem.
But former US Federal Reserve chairman Alan Greenspan is warning all who will listen that China’s debt bubble is going to burst.
Greenspan explains that China's debt has become over-leveraged, with the overall level of debt rising from 140 per cent of its GDP to 230 per cent of GDP. The country requires ever-larger amounts of public debt to fuel its growth rate.
China’s remarkable gains in productivity and standards of living were all achieved with borrowed capital and technology. Greenspan points out that no Chinese companies feature on the annual lists of the world’s most innovative companies -- nearly half of those lists are made up of American companies. This is leading to a narrowing productivity gap between China and the US, which is putting serious pressure on the Chinese economy.
Greenspan says the reality is that China is hitting the ceiling and its growth rate must slow. The Chinese hierarchy is acutely aware of this and, according to Greenspan, plans to allow a number of companies go into bankruptcy.
Most of the institutional lending in China has been backed by the government but there is a substantial amount of shadow banking that does not have the same backing. The Chinese government is about to let some companies know 'the hard way' that it will not act as their guarantor. Greenspan alerts us to look out for Chinese company defaults in the future, perhaps in its "seriously overextended" steel industry or elsewhere in its manufacturing sectors.
Greenspan believes that a correction in China (if handled correctly) could be good for China in the longer term, but naturally Greenspan does not link this belief with the implications of excess iron ore production.
I do not think Australian markets (and our currency) are ready for the combination of excess iron ore production and a China downturn.
The United States has many more restrictions on who can buy a home there without a Green Card. Australia and New Zealand are the wild west of Asian money dumping, anyone can buy a house here who wants to dump money at low risk high yields. Why buy bonds when you can buy property in Australia and New Zealand?
I don't know whose policy is best - the US restrictive policy or the Australasian open slather policy - I am not an economist. I do know that it makes no sense to buy in Sydney on the seaward side of the North Shore line at present, nor in Auckland. There has to be a point where the Chinese economy tips, and the flood of money coming into Residential property slows, and domestic demand and debt levels won't sustain ever increasing prices. Australia (more likely to occur here, as NZ economic fundamentals stronger) may face the triple header:
1) Rising unemployment 2) Rising inflation and interest rates 3) Slow economic growth 4) Unsustainable private debt levels, compounded by increasing inability to pay debt off with rising unemployment and slowing economic growth.
The United States has many more restrictions on who can buy a home there without a Green Card.
Well it must have changed drastically and since I was buying up there in the noughties when anyone in the world could buy any type of property as long as they weren't an enemy of the US.
Well it must have changed drastically and since I was buying up there in the noughties when anyone in the world could buy any type of property as long as they weren't an enemy of the US.
I know lots of non greencard holders who own in the US. Is that state specific??
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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